Searching for a policy 'fix' to the confidence conundrum

In my last post I noted that we were still waiting for consumers to come to the party.

I argued that it can only be confidence holding them back. They've been paying down debt for 5 years. Interest burdens are falling and incomes are growing. And their net worth is increasing.

They're sitting on bulging pockets, full of cash.

And so they could be primed for a rapid comeback, but until they do, we're left waiting, and the economic recovery is going to have trouble breaking above the cloud line.

That's just where we're at.

And so one of my readers asked me, ‘so what do we do about it?'

Is there some sort of policy ‘fix' for this situation?

Well, I've got a few thoughts on that. Now I don't pretend to be a political expert. I don't even pretend to be an economist. I do pretend to be a race-car driver sometimes.

But it is a very interesting conundrum. And it's certainly not the first time that a western economy has found itself in the same jam.

So let's break it down a little more.

From an economics perspective it's a bit curly. At one level a high savings rate is good. It's puts aside the money we need to fund the infrastructure (and wealth) of tomorrow. If we didn't save anything, we'd consume all our beans, and eventually be left with nothing.

But at the same time, if savings is too high, then we're not consuming. And if consumers aren't consuming, then businesses aren't investing in production. And if we're not investing, then we're not building the capacity to build wealth tomorrow AND the economy can kind of grind to halt.

Yep. It's a tricky and prickly one.

So the question then is, when is savings too high? Well, we've opened up a can of worms there. Economists won't be able give you a straight answer on that (like they ever give you straight answers). In short, it probably depends on where you're at.

There's going to be an art to getting the balance right. But with 5 years of above trend savings behind us, I'd argue that it's time to shift the balance back towards consumption.

Ok, we'll how could we do that?

Well, first of all, we can make consumption cheaper and more appealing. That's where Glenn ‘gun-happy' Stevens comes in. Interest rate cuts make the cost of borrowing to fund consumption cheaper, but it also makes saving less rewarding, by reducing returns on normal bank deposits.

Trouble is, that so far, this doesn't seem to be doing the trick.

As I've said, a lack of confidence is a real anchor weighing on consumption, even with rates at 50 year lows.

Blimey. So how do we fix that?

Well that is a very interesting question. And the answer is probably political.

I don't know what you think, but I'd argue that the government is probably the only institution with the will and the resources to actually create a shift in consumer sentiment.

And I'd argue that, given how much swings on it, it is has a mandate, if not an obligation, to get its hands dirty with this problem.

Not that I think that the government should engage in endless panglossian propaganda. But I could see a role for an institution that reminded Australians of just how good we have it from time to time.

Boy could we use that now.

And not that I'd want the government to be endlessly pumping consumption. As I said, saving can be a good thing. But I do think there could be a role to play in actively getting the balance right.

We already lump too much on poor old interest rates. Poor old Glenn's got to guide a multi-billion dollar economy with one simple lever.

Ultimately, it's exactly the kind of thing that'd I'd support government getting involved in. Confidence is a public good. Nobody's going to (or even could) go out and make it on their own, but everybody would benefit.

Oh to dream.

But it's never going to happen.

First of all, I wouldn't trust any product of the current political system with that kind of power. I'm not a cynic, but I just can't see any politician seeing past their own re-election ends to the greater national good.

Ok yes, I am a cynic.

And I don't see the political system rising above the theatrical farce that passes for politics these days. (I say ‘these days' because it's nice to believe that once, we were blessed with meaningful and intelligent political debate. But I doubt that was ever the case.)

Because you see it play out over and over again. The government (red or blue ties) tries to talk up the economy. If they can convince households that the economy is going well, consumers will consume, and it will be a self-fulfilling prophecy.

But at the same time, the opposition knows that if they can scare households enough about the direction of the economy, they might get them motivated enough to turf one bunch of ties for another. Fear = potential votes.

And with a media that knows that readers will pay good bucks to be given a good scare, there's no shortage of hacks who'll give this debate-that's-not-a-debate all the heat it needs. Not in any meaningful way – just enough to keep the public at a comfortable level of panic. Fear = sales.

But this theatre of make believe has a real impact on the economy. If the opposition wins the battle of narratives, then consumers get scared and the economy shrinks. If the government wins, then consumers consume and we do ok.

That seems a very high price to pay just to let a bunch of ties in Canberra argue about who gets to be boss.

But that's the system we've got. And useful debate on meaningful problems (are we saving too much? do we need to be investing more?) never gets the air it needs.

And so we're stuck with a system where consumer sentiment and our economic fortunes swing on the persuasive power of self-interested politicians. If that sounds tragic, it's because it is.

Ok, I'm being a bit of a downer today. Anyone else see a way out of this mess?

But the real question is how do we play it as investors?

Well, the more people I talk to in the industry, the more people I talk to on the street, the more I get the sense that the election is weighing on people's minds – probably more than it should.

As I said, I don't think it will make as much practical difference as people think it will – not to the big picture. But the election is making the future seem uncertain, and this is holding confidence back.

But on my analysis – that's the only thing holding things back. Once it clears, things could bounce back very quickly.

And consumers will start consuming again at some point. They just won't keeping hoarding more and more cash.

So it's another reason to me to get in ahead of the herd. While they're still dithering and worry about an electing ties, you can get in there are grab the bargains before the next bull run launches.

We are in a new playing field now…for many reasons…and consumer confidence has of course been well and truly battered by the realities of 2008. Yes, there is a perception that that was perhaps nothing compared to the correction we may have, as Mickey and Dave attest above with their comments. And perhaps rightfully so.

Whilst you noted in your last blog Jon, household debt is indeed coming down, but in reality it has a long way to drop before it comes to a sustainable and acceptable level. It needs to come down. A lot more. People now know that and have felt what high debt levels and exposure can feel like. Not nice.

People also are starting to question this growth for growths sake economic model that you seem to espouse, and which underpins your whole philosophy. This consumption based model is in many ways based on greed, and as the core issue driving demand and inflation, is now bought into question. Economists measure quantity. But the reality is, life is not all quantifiable. What really matters is quality.

Perhaps astute people are refraining from this questionable consumptive capital oriented lifestyle towards a more sedentary, less stressful, less market oriented perspective on life that doesnt value quantity over quality…that places family and relationships before new cars and Mcmansions… personal freedom over debt and ego driven portfolios.

This stands in direct contrast with the growth for growth sakes economic paradigm, and personally for the sakes of humanity, i hope it continues.

Good on you Dean. I too being one of those egotistical asset portfolio building ‘Trumpster’s’ from time to time require a slap with the intent to recognise what life is really about. I’ve read it somewhere……….the century of realisation! Unfortunately however, on a global scale, greed will always (at some point in time) defeat sensibility……….time has been the great judge of that. It’s human nature that those with the ‘have nots’ want what the ‘have lots’ have got.

World population increases, that’s growth. Most of us have what we need and we should be happy with that. A lot of us are, especially if we are healthy, wealthy and wise. The system we live in is as complex as the human mind, brain. Australia is underpopulated inland, there is more room than work there. We are engaged in the world economy. If the Aussie dollar is being traded a lot it will go up, bad for our export industry, good for the cheaper imports for many goods we do not need because we have what we need. I am an old guy, how about a response from a young guy?

I see a lot of the same Blokes commenting here all the time on Jon’s web page. You are all, either wishing he is correct, or you are just stirrers and stirrers will always agree with each other because of the herd mentality. However this is a great Country and a Democratic one and I do respect other people’s comments as I expect the same in return. Once again we all have to stop living in a fool’s world who always want what the Jones’ have. In 1929, fools threw themselves out the windows of 20 story buildings as they had no previous Knowledge of the past. In time we will all learn from the past. To date, are we all blind or can’t we see that the U.S. economy is on a lift big enough to drop the Australian dollar, with it’s AAA credit rating. This is the last year we will all be able to buy, economically, mark my words. Ken.

Quality is better, lasts longer and is better for the environment, the drawback is that it’s more expensive; however, in the long run quality is the best way to existence.
From that frame of arguments comes an old point of controversy on the usefulnes of human labor namely that what for some it’s important: for other it’s unnecessary

JJ, you are spot on. I feel that Jon is asking people with your dilemma, “Which comes first, the chicken or the egg?” His conclusion is that someone has to take the bull by the horns and stimulate movement within the economy; and the Government is the only entity with the borrowing capacity to get its hands on the type of cash required. Judiciously directed spending, on productive infrastructure, could get the ball rolling. Unfortunately, just as no man is an island, Australia, despite its geomorphology, as the island continent, is part of the Global Village, waiting for the US to sneeze. Our financial experts must be alarmed at the slow and miniscule response to the gargantuan money-printing in the US Fed’s attempts to stimulate their economy. They are probably saying to each other, “It is not working over there. Why cripple our country’s children with enormous debt, when we do not know whether the plan would work?” Big Joe is definitely worried, or makes out that he is, with what has already been borrowed.
Jon, it is good to see that someone knows his ‘Candide’ by Voltaire.

Ken..your position regarding conflict exposes your age mate…Nowadays, we are not all yes men, and nowadays, it is accepted and actually perhaps perceived as a positive thing, to question..to put up alternative positions that may perhaps bring to the fore some potent of problems that others position entails. Conflict, and varying ideas and opinions are seen as natural, and to be embraced….not ideas of stirrers , but perhaps profundities from different perspectives. Jon asks for discussion, and within that i think he expects, and even desires some alternate view points. This has nothing to do with the herd mentality. Perhaps, on this forum, (with it’s pro investment/ pro real estate bias) to blindly agree with Jon would be a better example of that.
I heard a nice phrase today…that we are in a “crisis of trust”….and i think this is a global phenomena ….
Ken, (and Jon)……i would argue we are in a period of “discontinuous change”…where the past does not actually prepare us for the future…and this is one of the main problematics that all economists face…the past is not good at predicting the future..what does stock brokers jumping from buildings in 1929 really tell us for the future Ken…if its all a matter of time..how long is that time to be?…what is going to be the result..
Interestingly, since 1930, the exponential growth of knowledge itself would suggest we have sooo much more potential …intelligence..options and paths available , that the possibilities that were present in 1930 appear primitive at best to most of us now.
Sure…astute and wise people are questioning the current paths being followed by the market leading US of A, as Tom above suggests.
Sadly, the Job security that Tom and JJ desire is a thing of..yep..the past…and is also part of the package that “investors” desired reduced a few years ago in ways to keep prices down by debasing labour costs… Bring back labour security and bring back inflation…
We not only now await sneezes from our old time buddy America, but our new biggest global buyer of our resources, the Chinese, where but a fart in their system can lead to market incontinence in Aussi.
The X generations woes..who dont have the security that our forefathers had regarding guaranteed secure pensions has grown this herd of insecure herd following self managing greed oriented slaves to the wheel..and the recent (in their eyes) wiping of their hard fought for savings at the whim of the market managers..governments, big business and global mafia elite, …never before felt by the current generation of australian folk….all feed into this crisis of trust..that is going to underpin future trends…
…..bring it on i say, if it means a change from one eyed investment oriented perspectives of ones wealth, happiness , success and life…..

Dean, Wow, what a reply. Are you ashamed of your age mate, or your parents, or were/are you one of those people that never listened to your parents and teachers and thought he knows it all. This is probably why you create problems and try to push it on to others. People have now learned from the past that the stock market never fails to rise above the last crash, or low. So, no more fools jumping from buildings. House prices have done nothing but gone up since my father bought the house I was born in. But you know better don’t you. you can have your doom and gloom as no intelligent person will listen to a kid who thinks he knows it all. You can apologize in a couple of years if you are man enough as I will to you also if I am found to be wrong. Cheers, Ken.

Ken..personal attacks aside…wow..you dont seem to handle people postulating different perspectives than yours do you…why do you have to get personal?.. I dont see anywhere where i have insulted you..(where as you have stooped to call me…a stirrer, problem maker, and unintelligent, as well as a kid)…He He..Your arguments show signs of insecurity and inability to debate coherently i would suggest. What i did suggest however, is that things have changed since you were young and educated..(You have previously described yourself as older, and thus i thought it ok to explain to you that education regarding conflict management has changed substantially in recent years..and its not something to be scared of…)..i dont see how this is offensive. Sorry you found it so.
I wish i was a kid..knowing what i know now..(im actually a young, well educated 50 year old Ken..with a degree and 5 yrs teaching at university in Oz as but some of my credentials for your information).. certainly not ashamed of my age, but yes, a kid in many ways.
I also enjoy the education and experiences that i have accumulated, as well as the travels i have and do undertake…having been to in excess of 50 countries, lived in many for extended periods of time, and also worked and volunteered in many, and invested in realestate in many..presently my “portfolio” includes real estate in 4 countries : 6 houses..2 apartments..2 blocks of land……all things i think which help me to garnish a experiential based world view and hopefully some wisdom, i hope perhaps beyond my few years on this mortal coil…still..i certainly know i know naff all in the scheme of things, and that there is a lot more to know. I hope we can agree on that…as in Ken, surely you do not claim to be the holder of all knowledge regarding to this topic and others that we face as humans nowadays.

Sorry Ken, but i stand by my argument. i take it the last 5 yrs of side ways/ even backward house prices in the world..and certainly in Australia, (my house in central Brisbane has had 50k stripped off it pre gfc peak alone…) dont fall into the your above statement about house prices always going up? Sure, my house has gone up substantially since i bought it 20 yrs ago, but the average person who has bought in the last 5 yrs is sitting on a idling asset, if not a negative one.

If i am indeed to apologize to you or vice versa maybe we should set the framework for such a apology. You mention the framework of a couple of years Ken..what do you foresee will happen in this time, that will make my apology forthcoming?

I take it you mean there will be a significant reemergence of the Housing market and a resurgence of house prices in Australia…(if so i would be very happy to apologise and eat sour grapes… such growth suits me massively Ken..Im an investor see…) but, i do not think this can or will occur.

So whats the parameters Ken…he who perceives he understands so much more than this whipper snipper…will you commit to a ,lets say, a 15 % increase in the average Australian House price in the next 2 years..(Approx 7% gross… per annum?)..August 2015?

Given a annual inflation rate in aussi of (average 2.8% over the last 10 yrs), im suggesting you postulate just over 4% net growth….would that be to you a fair indicator of your position? Naff all really dont you think…Id prefer you to take a stronger position really…

Dean, I see you as saying the same things, and I can’t see anyone changing your mind. About not taking constructive criticism, you can’t take it yourself, can you. You should read my original blog again. As you say, no offence meant, you go right up to that line. you originally took offence as I never mentioned your name first. As for education, words prove nothing. To me, you seem to be taking this personally. I have never even seen an Engineer with any common sense, let alone some so called educated types. Walt Disney was a shoe shine boy, read your history. You seem in two minds about house prices. One second your saying you made a lot of money on houses, over time, then you are saying no one else will be successful. But I take your challenge on board and if I were a gambling man, I’d bet you a lot more than the 4% you’re prepared to offer. So yes, I am saying by the end of 2015, house prices will be more than 4% and then you can apologize to me on this blog or I will to you. Perhaps one day we may be able to face each other and shake hands. Don’t loose this web page as this will prove to be a witness to all other bloggers. I personally would like to apologize to Jon for the undeserved respect he has shown to both of us. Have a stiff drink and chill out a bit. Cheers, Ken. PS, I’m not old enough to be your father,

Dean, You seem a little bit worried now. I can’t see how 4% net comes from a 15% lift in house prices. But either way, I reckon let’s forget the crap and leave it at 15% gross then over two years. $500,000.00 house in 2013? Yes mate, you got that one right. What happened to your initial beliefs. By the way mate, I don’t like the hmmm after your statement of Nazis. For the record mate, my father got 5 bob a day to shoot them and fascists. How about you. Laying tiles? what happened to teaching. More money in renovating, eh? That’s the only way to get ahead. but that’s only my belief, eh? Cheers

Ken…average inflation the last 10 yrs..2.8%
add 4% profit per annum. (you do want some of that dont you? thats why you invest?)…..
(i can get a lot more with term deposits…getting 9% in india!)
total 6.8%..ive rounded that up to 7% per annum.
compounding that growth into the next year i came up with the 15% gross figure.
simple really..
No back tracking…not worried..just clarifying.

Im not factoring in holding costs…opportunity costs, capital gains tax blah de blah..im trying to make our understanding simple, and by doing so, well skewed in your favor.

Of course, if a house is worth 575k in 2 yrs..up 75 k…and you borrowed to buy that house you would have to factor in borrowing costs…(lets say 5% mortgage…50k wiped out on interest only)…holding costs…rates/ repairs / vacancy rates/ management fees/ insurances (another 10 k to throw away perhaps? probably more honestly 15 k?)….starting to leave that 75 k looking rather sad isnt it…oh well..at least it means ya dont have to pay so much capital gains hey…..

and im not factoring in anything for the grey hairs coming from worrying about all the above…

If i had 500k in the bank ..tied in a term deposit…at 5%…i would gross 25 k a year for doing naff all and pay 30% tax?…taking home 17,500 bucks a year…35 k over the 2 yrs..(uncompounded)…

Starts to make the investment house look shabby in ways…

I retired years ago from chasing the dollar Ken… (15 yrs ago actually)…much more fun things to do…im tiling for myself…helps to keep me entertained and sober…mostly.. Actually, never been so busy in my life since retiring, in a nice way.

Dean, I don’t know how you can get to sleep at night. If I had $500,000, I’d buy 5 residential blocks of land in Cairns, a town with an International Airport, where I don’t have to freeze my pride and joy off. According to RP data, Australian capital city house prices lost 1.2% in 2004, and 3% in 2007. If you lost $50,000 on one house, that’s $15,540 over 2 years on a new house in Cairns. Was yours a palace, or was it B.S. Talking about grey hairs, are you saying you don’t have any. what sort of dye do you use. I did say A drink, not a few. By the way, you can get 10% in rent, plus the appreciation on a house over money in a bank. No wealthy person got rich from earning interest on money in a bank. Better have another one, cheers, Ken.

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